What is ESG and why is it so important?
If you are asking yourself this question, you’ve come to the right place.
ESG stands for ‘environmental, social and governance’. It encompasses a range of criteria that ‘responsible’ companies use. You may already report on ESG performance to your investors and employees, or you may just be starting your work on ESG issues.
Non-financial reporting measures have become increasingly scrutinised by investors, and these include a range of strategic reporting criteria concerning employee stakeholders. These people, talent and development agendas sit within the domain of HR and have recently seen a dramatic rise in strategic importance across the c-suite.
Many acronyms (CSR, ESG, DE&I…) are used to describe non-financial performance, an ever-more important factor for ‘responsible business’. This guide will help you understand more about ESG performance and how HR has a crucial role to play in the determination, implementation and measurability of many ESG criteria and their reporting.
When your CEO comes knocking on HR’s door looking for quantifiable evidence around ESG-related people issues – such as diversity, equality and inclusion (DE&I), gender pay equity, upskilling and employee development, and workplace culture – will you be ready to provide it?
With a growing public expectation that businesses should use their resources to take positive action on workforce DE&I, as well as issues relating to the environment, sustainability and wider societal change, can everyone in your organisation talk confidently about your ESG performance?
Poor ESG performance can have a negative impact on productivity, profitability and reputation. Investors demand transparency on ESG performance. Consumers increasingly consider ESG factors when buying products and services and making investments. Employees want to use their talent and time to make the world a better place.
Delivering against current global and local ESG challenges requires excellent and agile leadership. HR has a pivotal role to play. We’re here to inspire and support as well as to canvas the wisdom of the crowd from members of our senior HR community who are learning, in real time, how they can partner with the c-suite to articulate and explain the ways in which people and talent agendas impact on meaningful ESG strategy.
Read on to learn more about the importance of ESG to HR leaders and find answers to these questions:
ESG stands for a broad range of ‘environmental, social and governance’ criteria which organisations use to run themselves ‘responsibly’.
Issues linked to ESG include workplace and employment practices as well as environmental impact, sustainability, diversity, equality, social good and leadership, to name a few.
It is a framework for looking at non-financial factors alongside financial factors in the investment decision-making process. Investors now use ESG performance data to make decisions.
Investors who would previously ‘screen out’ socially unfavourable stock such as arms or tobacco now rate businesses by looking at the whole range of ESG performance data – from the reduction of carbon emissions to pay equity and gender and ethnic mix in the boardroom.
The CFA Institute explains that ESG issues are often interlinked. Measuring impact is challenging, with a wide range of metrics used.
Businesses that recognise the positive link between ESG performance and financial performance know they need to evidence:
These and other ESG metrics are now used to demonstrate the responsible governance and positive impact of businesses.
Are you building ESG issues into your strategy and reporting effectively on ESG to all your stakeholders? Below, we provide a range of conversation starters.
The Paris Climate Change Agreement in 2015 committed governments to net-zero emissions by 2050. The UK government’s intermediary commitment in 2020 aims to reduce the UK’s emissions by at least 68% by 2030.
Environmental criteria look at business performance on stewardship of the natural world and typically include data on carbon emissions, progress towards 100% use of renewable energy, management of hazardous waste, resources used, and the consequences of emissions; for example, poor air quality and water contamination.
There is increasing alarm at the speed of climate change. In the latest report by the United Nations’ (UN) Intergovernmental Panel on Climate Change, climate scientists warn that we are already perilously close to tipping points that could lead to cascading and irreversible climate impacts.
UN Secretary-General António Guterres has called for action to triple the speed of the shift to renewable energy, warning that “we are on a fast track to climate disaster”.
The UN states that to keep the 1.5°C limit agreed in Paris within reach, global emissions need to be cut by 45% this decade. But current climate pledges would instead result in a 14% increase in emissions.
Guterres describes any continued investment in new fossil fuels infrastructure as “moral and economic madness” when cheaper, renewable solutions provide green jobs, energy security and greater price stability.
S = Social
ESG reporting on social criteria typically looks at your organisation’s relationships with people (customers, suppliers, employees) and your reputation in the communities in which you operate.
G = Governance
Typical ESG governance criteria cover the internal business processes, controls and procedures that your company uses to make decisions, for legal compliance, and to meet the needs of external stakeholders. Most importantly, governance looks at leadership.
Investors and employees may want to know the following:
Your organisation might already have (or be aiming for) membership of the FTSE4Good Index, the Prince’s Responsible Business Network, the Good Business Charter, or the UN Global Contact Network UK.
The impact of the global pandemic and increased urgency about the climate emergency have brought about greater focus on ESG performance.
Businesses are now expected to create positive action on:
The search for strategies for creating a sustainable business is becoming more pressing.
A growing cohort of millennials is placing great emphasis on human capital, social justice and the environment.
Over the past two years investors have moved record sums of money into ESG funds focused on improving the environment and promoting social good. Bloomberg Intelligence shows the meteoric rise in ESG-orientated investing.
Since Russia’s invasion of Ukraine, our attention has been focused on the war’s horrifying levels of human suffering. But the conflict is having a far wider global impact.
UN Secretary-General António Guterres recently warned: “The war is supercharging a three-dimensional crisis – food, energy, and finance – that is pummelling some of the world’s most vulnerable people.
“We are now facing a perfect storm that threatens to devastate the economies of many developing countries. We can maximise this moment to push for the transformational change our world needs. Look no further than the energy crisis.
“We must work towards phasing out fossil fuels, accelerating the deployment of renewable energy, and pull developing countries back from the financial brink.”
The importance of improving DE&I is also being debated at the highest levels. In March 2022, the World Economic Forum launched the Global Parity Alliance to accelerate better DE&I outcomes.
The inequality gap, particularly for BAME communities, has been further exacerbated by the pandemic. George Floyd’s death at the hands of police in the US brought racial discrimination to the top of the global agenda. The UN Principles for Responsible Investment call for proper disclosure and action on racial diversity (www.unpri.org/about-us/what-are-the-principles-for-responsible-investment).
All stakeholders, employees, regulators, shareholders, customers and non-government organisations (NGOs) are now increasing their scrutiny of the connections between sustainability and financial systems and demanding greater accountability and leadership on ESG issues.
Companies can attract negative reactions in the media, on social media and in their communities if they fall short on major ESG issues.
The enormous challenge of limiting the global temperature increase to 1.5°C by 2030 to avert a climate emergency has created growing demand for urgent and more radical action.
Participation in non-violent protests has significantly increased. People of all ages in the UK took to the streets recently in demonstrations to highlight government inaction on climate change.
James Cook, in September 2021, explains:
“ESG and Corporate Social Responsibility (CSR) are both concerned with a company’s impact on society and the environment. The major difference between them is that CSR is a self-regulating business model used by individual companies, but ESG criteria are what investors use to assess a company and determine if they are worth investing in. Studies suggest that more environmentally minded firms offer better returns for investors, so ESG and CSR are two important considerations for businesses, especially start-ups.”
Sources and useful links:
The UN has defined 17 Sustainable Development Goals (SDGs) which it wants to achieve by 2030. These include:
Some 40% of the world’s biggest companies use SDGs in their reporting processes. By aligning your ESG strategies with the SDGs relevant to your business, and measuring your real impact, you can highlight your contribution.
The term ESG was first used in 2005 by former UN Secretary-General Kofi Annan, who commissioned Who Cares Wins, a groundbreaking report that set out how to better integrate environmental, social and corporate governance issues in investment management.
Your reputation on ESG performance affects all aspects of your business.
Accountability on ESG factors is now the norm. Today, investors, fund managers, employees, regulators and consumers all scrutinise ESG performance.
Investors now actively score a company on ESG factors. A favourable ESG score can help to attract investment and talented employees, and enable greater access to capital. Fund managers look at ESG factors to assess opportunities and risks that may affect a company’s long-term sustainability.
If you are still wondering why ESG matters for all organisations, you may be surprised to learn the extent to which ESG issues drive investment decisions, business strategy and employee motivation.
The global pandemic has resulted in greater focus on the social impacts of a business, particularly on its workforce and wider supply chain, including:
HR expertise and leadership can be vital to business success on ESG.
HR professionals can play a vital role in supporting businesses and employees to adopt ‘green’ behaviours.
Examples of easy to implement ‘green’ goals:
HR professionals can also build support for ‘green’ responsibilities at management and c-suite level. Buy-in from senior business members will ensure that environmental practices are adopted at every level.
You might, for example, be looking to improve your culture of learning and development, setting targets for a diverse and inclusive workforce, or establishing a completely sustainable supply chain.
If so, you should be reflecting on the following:
Use these questions as the basis for conversations with internal stakeholders working in procurement, CSR professionals and the c-suite.
If you’re thinking about how HR can have more influence on how people factors are considered in board level decision making, Ed Houghton, the CIPD’s Head of Research and Thought Leadership, recently set out three key approaches:
The Corporate Governance Code states the need for employees to be considered in boardroom decisions, while the Wates Principles set out by the Financial Reporting Council hold that a board is responsible for overseeing meaningful engagement with stakeholders, including the workforce.
Consideration of all your stakeholders is key to ESG performance. As well as employees, ESG matters to your shareholders, retired staff, investors, customers, suppliers, charities and the wider communities in which you operate.
Sources and useful links:
Using ESG metrics to govern helps businesses achieve a positive impact on society and the environment and enhances long-term business performance.
The HR metrics you need to measure ESG performance and drive improvements will depend on what sort of business you are in, but could include the following examples:
One of the most important HR measures is assessment of the organisation’s culture from an ESG perspective.
Typically, the CEO – and board – will lead on and integrate ESG ‘purpose’ across an organisation and mitigate the risks of strategic ESG challenges.
Other senior leaders, including HR, will help develop ESG strategy and communications. Some businesses have chief ESG officers or chief sustainability officers. Managers across your business need to be able to champion ESG.
Organisations face increasing scrutiny of their ESG performance. As an HR leader, you’ll want to mitigate any risk of litigation or regulatory sanctions. Risk implications will vary from business to business.
ESG is now a key driver for new laws, performance standards and reporting. Legal compliance is evolving to include ESG risk governance. Find out more about why employment law enables responsible business behaviour.
There is a particular focus on whether you are operating in a sustainable way, and without violating human rights. You will want to have robust checks in place to avoid employing victims of modern slavery or use of child labour anywhere in your parent company or supply chain.
There are Guiding Principles on Business and Human Rights (UNGPs) which businesses can pledge to follow.
Diligence on human rights is particularly relevant to larger businesses, which must comply with the UK’s Modern Slavery Act.
Choosing sustainable suppliers which have a positive impact on society and effective governance will contribute to meeting your ESG goals.
Screen your suppliers during onboarding and procurement, focusing on the ESG metrics that are important to your business.
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